Portfolio Size

Abstract

The number of holdings in a portfolio plays a significant role in capturing the excess return of an active management strategy. Portfolio size also has a considerable impact on variability of the outcomes—minimizing the tracking error between the portfolio and the strategy. Yet the number of positions held in a portfolio is seldom arrived at through deliberate study. The author analyzes the size question from three perspectives: as a statistical sampling problem, as the outcome of a fundamental law of investing, and as the result of iterative simulations. The results demonstrate the importance of actively selecting the number of holdings for a given strategy.